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Property Rights Theory and the Employed Inventor

This paper explains and defends the legal rules governing employed inventors in the United States. In particular, it justifies the oft-criticized propensity of courts to defer to apparently one-sided "pre-invention assignment" agreements that give corporate employers broad rights in the inventions their employees make during (and in some cases briefly following) employment. It also explains legal default rules that operate in the absence of contracts. All of these rules make eminent sense from the perspective of transaction cost economics and property rights theory. Since most corporate inventing involves large teams of researchers, and in many cases produces numerous individual patents covering various components of a single R&D project, corporate inventing can be seen as the product of numerous highly complementary inputs. Permitting each employee to own the patents resulting from his or work would result in complex bargaining problems, and in many cases holdups. As predicted/recommended by both transaction cost (Williamson; Klein, Crawford & Alchian) and property rights (Hart; Grossman & Hart) theory, the law thus strongly favors an integrated ownership structure (i.e., employer ownership) where complementary inventions are likely. The paper goes on to point out, however, that there are several oft-overlooked counterweights to the traditional pro-employer bias of this area of the law. Changing practices favoring out-sourcing and other contractual arrangements -- as opposed to traditional employment -- receive more generous treatment, and should. Also, because of difficulties involved in proving when an invention was actually made, there is a hidden "exit option" in favor of employees which allows them in many cases to leave the employer to flesh out a promising new technology. Putting the law of employee inventions in context, then, provides a strong counterargument to the traditional critique that this area of law is overly generous to employers.